Aggregate Supply Flashcards
(24 cards)
What is aggregate supply?
Aggregate supply is a total supply of goods/services produced within an economy at a specific price level at a given time.
Why is aggregate supply curve sloping upwards?
Due to rising costs as real output increases, resulting in higher average prices
What causes a movement along the SRAS curve?
A change in average price in an economy.
Define the term expansion/contraction of SRAS
Expansion of SRAS is a rise/fall in real GDP due to an increase/decrease in the average price level, shown as a movement up/down along the SRAS curve.
What causes a shift of the SRAS curve?
- change in conditions of supply such as rising costs of production, exchange rates and tax rates.
How does a decrease in costs affect the SRAS curve?
Shift right, increasing output at every price level.
What is long run influenced by?
A change in productive capacity.
Define productive capacity.
Productive capacity is the maximum output an economy can produce by improving either a quantity, quality or both of its factors of production.
How is long term economic growth achieved?
By increasing productive capacity of an economy.
Which three factors influence SRAS?
- changes in costs of raw materials
- change in exchange rates
- change in tax rates
How does appreciation of the exchange rate affect the SRAS for a country?
An appreciation of the exchange rate causes SRAS to increase, shifting the curve right, due to cheaper imports in terms of countries own currency, lowering input costs.
What is the effect of the depreciation of the exchange rate on the SRAS for a country?
Depreciation of the exchange rate causes SRAS to decrease, shift left, due to more expensive imports in terms of the countries own currency, increasing input costs.
How to decreased tax rates impact the SRAS?
Decrease tax rates cause SRAS to increase, shifting the curve right, as taxes represent an additional cost for firms.
How do increased tax rates affect SRAS?
Increased tax rates cause SRAS to decrease, shifting the curve left, as taxes represent an additional cost for firms.
How do cheaper imports affect the SRAS?
- lower input costs for firms - shift SRAS outwards
What happens to SRAS when input costs rise?
When input costs rise, the SRAS decreases, shifting the curve left, as fewer goods/services can be produced with the same amount of money.
Describe a classical view of LRAS.
The classical view of the LRAS curve is that it is perfectly price inelastic (vertical) at a real national output with full employment of all available resources
What is the Keynesian view of LRAS?
The LRAS curve is more L-shaped with supply more elastic at lower levels of real national output and perfectly price inelastic at full employment.
How does the classical view believe the economy will self correct?
The classical view believes the economy will always return to the full employment level of real national output in the long run, but at a different average price level.
What is the positive output gap or inflationary gap?
Positive output gap or inflationary gap is a period of extreme economic growth where real national output exceeds the full employment level.
What does Keynesian view suggests for the government?
Suggest the government should increase its expenditure to shift AD and change the negative animal spirits in the economy.
What are three factors that can influence long run AS?
- technological advances
- changes in relative productivity
- changes in education/skills
How do tech advances affect LRAS?
Shift right, increasing the potential output of the economy.
How does competition policy affect LRAS?
Competition policy and shift the entire curve outwards by preventing monopoly power and increase in the number of firms supplying goods/services in an economy.
